How YouTube Makes Money

(EDIT – Updated)

YouTube’s 1st ever video was uploaded on April 23rd 2005. It featured Jawed Karim who is one of YouTube’s founders. In the video he was at the San Diego zoo, since then YouTube has come quite a long way. Before the creation of YouTube back in 2005, people could easily send text, as well as photographs & other images as attachments to the email, but the sharing videos over the Internet was nothing that anyone could think of.

However, thanks to Steve Chen, Jawed Karim & Chad Hurley 3 former employees of Paypal. These former Paypal employees are the brains that were behind YouTube‘s creation, and ever since YouTube was created, video sharing became very easy like never before. All that a YouTube website visitor needs to do is visit YouTube, search for any type of video & then sit back & enjoy the video.

On YouTube, you can also create your own viewer profile simply by registering, which is free. Once that you have your profile set up, you can then upload your own videos to the site. The videos on YouTube are displayed using technology software called Adobe Flash video so that viewers can view them. You will need to have an Adobe Flash Player plug-in that is installed in your web browser so that you can view the videos.

Before we tell you how YouTube makes it’s earnings, try & understand a little bit about YouTube’s business dynamics, which includes the high cost of hosting & distributing an unbelievable amount of videos. If we consider the costs of a website, the 1st thing that would come to mind is the sourcing of all the content. Most of the content found on YouTube is free since most of the videos are uploaded by people who are members of the site. Interestingly though, about 75% of YouTube’s content comes from outside the USA! There are however, costs that include hosting costs, uploading costs, the costs for transcoding the videos & most important, the costs for distributing the videos. The estimated operating costs that YouTube pays out each month for it’s bandwidth usage is about 30 million U.S. dollars, a very large amount of money!

How does YouTube Make it’s Money?

In November of 2006, Google bought YouTube for the sum $1.65 billion U.S. dollars & now the website functions as a subsidiary of Google Inc.. The fact that Google showed it’s interest in buying YouTube means that YouTube is absolutely a money making venture and that YouTube can make huge amounts of money. Where does all of this profit come from & why is YouTube a very successful business financially? Read on below to find out how.

Income from it’s AdvertisementsBy far, this it the biggest source of any website & YouTube is absolutely no exception. If you type in something in YouTube’s search box & hit enter, you’re directed to a webpage that will display the results of that search that will match the search terms that you typed into the search box. If you take a look at the right hand side of the search results webpage, you will find many links to websites that are featured under their section called ‘Google Ads’. These ads are nothing more than just Google AdSense advertisements & each time that someone clicks on these ad links, YouTube earns some money.

Another way that YouTube earns some money through it’s advertisements is that it places ads before, during and/or after a video . This is what YouTube calls premium advertising & it’s rare on YouTube. Even though millions of their videos are viewed by countless people who visit their website, you will see that barely any of their videos have ads placed in them. There is only 3-4% of their total videos viewed on their website that have ads placed in them while the rest of their videos don’t have these ads.

YouTube’s estimated income that they earn can be figured by an easy calculation: if the amount of income gained from their advertising is more than their total cost per video, then the website definitely will stand to make huge amounts of profits. Now, their advertisements are not all exactly the same & will fall into 2 different major categories. Advertising that is a small part of the video & that play either before their video clip or at the end of the video, come under a category called macro-advertising. In the other hand, micro-advertising can include Google’s advertisements that aren’t part of their videos, but they will appear on the web pages the videos are displayed in.

In YouTube‘s website, you’d very rarely find a macro-advertisement but usually you’d find Google advertisements. It doesn’t matter what type of advertisements they are, the revenue of a certain website will be directly proportional to the % of it’s content that carries advertisements in it. Taking into consideration is the enormous popularity of Youtube & the millions of their website users that it attracts, YouTube does manage to make good money in spite of it’s humble advertising rates it gets for it’s micro-advertising.

Revenue From YouTube’s Sponsored PartnersAnother large source of income for YouTube are YouTube’s sponsored partnerships that they have with many media firms like MGM & CBS, whereby these advertising partners post their full-length films & television episodes from their television series, YouTube. This began back in the year 2008, after competitor websites like Hulu, had formed similar types of partnerships with different media companies including Disney & Fox.

Then in 2009, this feature had been launched for U.K. users, after the website formed it’s tie-ups with the many different media companies in that country. Now, viewers in the U.S.A. can rent many full-length movies on the YouTube website, and YouTube is planning soon to launch this feature across the globe. Recently, in March of the year 2010, the Indian Premier League matches had been broadcasted live on YouTube. This was the 1st time a major sporting event of any type was featured live on a website online.

Revenue From Clients Bidding on KeywordsIf you know any of the basics of search engine optimization (SEO), then you must surely be aware of what exactly keywords are. Keywords are single words or groups of certain words that many people will search for. If you begin to type something into the Google’s search box, you will see that there are many suggestions that will appear. The exact same way, that you find suggestions appearing below the search box found on YouTube also. Phrases that will appear are called keywords.

Now, say that the name of a video you uploaded to YouTube is called “How to Jump Around the House” & you want more & more viewers to come & “see” you jumping all around. Then, what is the best thing that you can do? Well, if you will make the title of your video appear as a certain suggestion, the moment that a YouTube user types ‘how to’, then the chances that YouTube users would land on your video’s webpage increases dramatically. For this to happen, all that you would need to do is to bid for those certain keywords. Then, the more the quantity of people who bid for those video titles (or a certain part of the title) to appear in their list of their suggested keywords, the more income is earned by YouTube!

These are just some ways in which YouTube’s website makes it‘s revenue. Currently, some new strategies are getting formulated to see an increase the revenue that YouTube makes. Going by the huge amount of website traffic that the YouTube fetches each minute, this shouldn’t be very difficult at all. Don‘t you agree?

[EDIT – Update] Youtube now has a paid subscription service called YouTube Red which has increased it’s revenue from their video sharing service. YouTube Red has a price tag of about $10 US and has several key features over the usual free version of YouTube and the best one according to most people is the ad-free viewing of videos.

Now that Google has added the YouTube Red subscription service and with the popularity of this paid subscription service, this is bound to greatly increase the earnings that YouTube achieves. Find out more about YouTube Red HERE!

If you have a question or comment on the article above the please feel free to leave us a reply below.

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